Bombing the bond market

0:00Katie Martin: Do you love listening to the Unhedged podcast? Why not experience it live this summer? At the FT Weekend Festival, you'll have the chance to put your questions directly to FT journalists and influential voices, including Rob Armstrong, that's me, and Katie Martin, my partner on the podcast. You can challenge our ideas and meet others who share your curiosity about the world. Join us on Saturday, the 5th of September at Kenwood House Gardens in London or online as the FT Weekend Paper comes to life. Register now at ft.com forward slash festival and enjoy 10 % off with the code FT podcast. There's more information in the show notes.

0:54Rob Armstrong: Cushkin Bond investors, be afraid because Donald Trump, the most powerful man on the planet has issued a warning Fall into line or we'll bring in the military? Listeners, you may think I'm either losing my mind or exaggerating for effect Frankly, I have to pinch myself sometimes But no, a proper battle has broken out in the bond market. And if we don't find a way out of it, we're all in trouble. The man at the centre of all this is Scott Besant, the US Treasury Secretary. He's been doing some pretty unusual stuff lately, to put it mildly, all designed as a show of immense American strength with rock solid US government bonds right at the centre.

1:39Rob Armstrong: The problem is investors are reading it all as a huge sign of weakness. a thinly disguised plea for help. Something here has got to give. And in the meantime, this is some proper old school markets cage fighting. They on the show, bonds are at war, and we are here for it. This is Unhedged, the markets and finance podcast in the Financial Times and Pushkin. In the great bond war of 2026, I am First Officer Katie Martin, a markets columnist in the fortified bunker of FT Towers in London. Joining me down the line from New York City, Rear Admiral Rob Armstrong. The big fella is back. Rob, are you feeling refreshed and reinvigorated and ready for action?

2:24Katie Martin: I had a great vacation. I went to Canada and started a trade war.

2:30Rob Armstrong: It's all your fault.

2:32Katie Martin: In fact, it is. And what's more, in Canada, I actually saw a bear, which is possibly the most Canadian thing you can do. Was it a black bear or a brown bear?

2:43Rob Armstrong: Because one of them you're supposed to run away from. No, it's a grizzly bear.

2:46Katie Martin: Black and brown are fine. Grizzly bear you run away from.

2:49Rob Armstrong: I think I would just run away anyway.

2:51Katie Martin: Polar bear, you just say your prayers and it's over. In any case, it was a good trip.

2:57Rob Armstrong: So bears aside, you missed not all of the fun in the Bonds battle, but a lot of the fun, some of the opening skirmishes of the Bonds war.

3:06Katie Martin: Yes.

3:07Rob Armstrong: I want to start this whole story for listeners in possibly the stupidest place in the middle. So last Friday, right, Besant had launched one of his interventions in the bond market in an effort to pull down borrowing costs. We'll explain what all that means in a minute, but it hadn't really worked. And a reporter asked the president of the United States about it. And this is what he said.

3:31Katie Martin: Did you direct Secretary Besant to intervene in the bond market? No, not at all. Now, he's a very capable man. He wanted to do it. Have you talked to him about another type of intervention? Is that something he will be doing? We have many types of intervention. That's one. The ultimate intervention is our military. And if we have to use that, we will. That is so weird. I mean, that's actually, philosophically, there's an interesting question here. If you wanted to bomb the bond market, what do you bomb exactly? Do you bomb the treasury itself or like the place they trade the bonds? Or is it more?

4:08Katie Martin: Maybe it's not bombed. Maybe it's soldiers. Like you're actually sending soldiers fanning out to investment banks across the world to bond trading decks with rifles.

4:18Rob Armstrong: Yes.

4:19Katie Martin: And, you know, we will fight them at the discount window.

4:22Rob Armstrong: Yeah. I mean, it does raise some interesting questions. You know, are they going to send Navy SEALs into the steepener trades or hold a gun to people's heads and make them buy the bonds? Anyway, I found this extremely amusing on Saturday morning when I woke up and had about a million messages. But it's not a funny situation.

4:41Katie Martin: Let me just say this. The rise in yields on long-term U.S. Treasuries is as serious as a heart attack. And even if the president says goofy stuff about it, we're in a serious situation here. And the Treasury Secretary at least knows what a serious situation it is, which is why he's tried various different ways of getting those yields down.

5:08Rob Armstrong: So we started in the middle of the story. Let's go back to kind of the beginning of the story. So regular listeners will know that a few weeks ago, the U.S. did something extremely odd and it linked arms with Japan and intervened in the currency markets to support the Japanese yen. So that is weird in itself. And Toby Nangle and I made a podcast about that while you were away. But like there was much weirdness about that whole situation.

5:35Katie Martin: But the takeaway. But I think let me just interject here, Katie. The basic strategy there is kind of straightforward. If Japan tries to support its flailing currency by selling dollars and buying yen, then that's a threat to U.S. yields because how Japan would raise those dollars is by selling U.S. treasuries, putting more price pressure on treasuries and forcing treasury yields up still further. So the MO there was quite clear, as weird as the execution may have been.

6:14Rob Armstrong: Basically, it's the Streisand effect, isn't it? It's this idea that, you know, please don't look at this thing over here. And then people go, oh, I'm now looking at this thing over here. Funny you should mention that thing. Funny you should mention that bad thing. I'm now looking at that bad thing and I don't like it. And then on top of that, out of clear blue water, so out of nowhere, after this whole yen intervention business, Scott Besson's Treasury Department comes along and says, right, so we all just as a matter of course, we buy back long term bonds out of the market. It's like a very dull housekeeping thing.

6:49Rob Armstrong: Yes. We're going to at least double the scale of these buybacks of long term bonds. And by the way, if that's not enough, we're going to buy back even more of them. And it's just aimed at making sure the market is, you know, operating smoothly. And again, the market is like, I'm sorry, how much of a problem do you have here? How desperate are you for me to not sell these bonds?

7:11Katie Martin: I think suddenly we've got a problem. The number of people who believed this was an operation aimed at improving liquidity in the treasury market was zero. I literally don't think... Well, it was one.

7:24Rob Armstrong: No, no. According to his own words.

7:26Katie Martin: No, he said it. He didn't believe it. I would argue. You know, just to talk about what these buybacks usually do, the treasury market is very important and you want it to operate smoothly. As treasuries in the market get older, they become harder to trade. So what the treasury and they want things trading very smoothly in a very liquid way. So the treasury periodically goes out there and says, we'll take your old ones and we'll replace them with very liquid new ones that everyone wants and the market will keep churning. That's pretty normal and has been going on for a couple of years. But to do it when there is no sign of market dysfunction, all there is a sign of is the market wanting to be paid more money to own long treasuries.

8:11Katie Martin: That's different from normal buybacks. And everyone instantly recognized that that is different from normal buybacks.

8:18Rob Armstrong: Well, that's it. So, you know, with the Japan intervention, the way that Scott Besant talks about it is, you know, we're just, you know, it's nice to be nice. we're helping out our friends in Japan. And the market's like, meh, I don't believe you. And then he does these buybacks and he says, you know, we're just making sure that everything is liquid and functioning properly. And again, the market's like, meh, I definitely don't believe you now. Come on, buddy. And at that point, that was when Trump was asked about the whole thing and he raised this idea of military intervention, which quite rightly no one is taking seriously.

8:48Rob Armstrong: But then even after that, there was a report in CNBC, Steve Leisman, he's a reporter who knows what he's talking about with the Fed and the Treasury and other stuff. And he was reporting that Scott Besson could tap the nearly$1 trillion Treasury General account to fund further bond buybacks. And so now you've got like a real outbreak of like proper nerves in the bond market that something is quite broken and that Scott Besson is quite worried about it.

9:18Katie Martin: Let me just briefly explain to listeners what the treasury general account is. It's the federal government's checking account. When you pay your taxes, the money flows into the treasury's general account. When the government buys stuff or gives people money, it flows out of that account. So it goes up and down, you know, under normal operations of the U.S. government. But taking that checking account, the kind of business account of the federal government and using it to prop up the treasury market, you know, and again, this is only hypothetical. It's a reported thing. You know, we don't know how seriously it's being considered, but that would be absolutely wild.

9:59Katie Martin: And it's very different, by the way, I should note, very different from quantitative easing, right? Quantitative easing is what the Federal Reserve does, it basically creates money to buy U.S. bonds. And that is one kind of trade. This is the government using your tax dollars, the government, the federal government itself, using your tax dollars to buy treasury bonds. Both have their downsides, but this is different and new and makes one a bit jumpy.

10:32Rob Armstrong: So in the middle of all this, enter stage right, Stan Drockenmiller. Now, Stan Drockenmiller is like, he is kind of a big deal in global markets. If this podcast had enough money for sound effects, then when you mention his name, there'd be like a kind of, like sort of angelic noise or like trumpets or something. Like he's kind of a big deal in global macro, global markets. And he has always been a mentor to Scott Besant. Besant himself, he told the FT last year that, quotes, in macro, there's Stan and then there's everybody else. Sort of true. Everyone agrees Drucker-Miller is like kind of a big deal.

11:19Rob Armstrong: Anyway, Drucker-Miller wrote a piece that's in the Wall Street Journal today that says, he just calls bullshit on this whole thing. He says that the buybacks are not liquidity management, they are price management, and that governments defending prices against fundamentals always lose. This is a sick burn. This is a burn. If Stan Druckenmiller goes to all the effort of putting a piece in the Wall Street Journal saying, this is stupid.

11:45Katie Martin: Yeah, and he's your former boss, basically, and you're the Treasury Secretary. It is a sick burn. You know, Stanley Druckenmiller has always, you know, and I feel I agree with him here. He's always been a deficit hawk. And his point is, what is the long end of the Treasury curve? What are U.S. interest rates telling you? They're telling you to cool it on the damn deficit. We have the largest peacetime deficit we've ever had at a moment of full employment. There's no justification for that. And if the Treasury gets into the business of telling the bond market to shut up, then they are silencing a signal that the government needs to hear.

12:30Katie Martin: Right. That's that's the gist of of Drekken Miller's argument. And I think it's a really good point and a really fair point.

12:37Rob Armstrong: Yeah. So it's it's worth kind of backing up a little bit and talking about, like, why are long term government bonds weak at the moment? And a really important part of that is U.S. borrowing costs, U.S. yields are very high by historical standards. So the 30-year yield, the 30-year borrowing cost is up at roughly the highest level since 2001. This is bad. The long end of the market is in a bit of trouble here. But, okay, first of all, it's not just the U.S. Correct. You can also look at yields for other countries that borrow much, much more money than they arguably should. So you look at France, Japan, U.K.

13:14Correct.

13:14Rob Armstrong: We've all got really high borrowing costs too. But normally the thing that does for bond markets, the kryptonite for bond markets is inflation. On this occasion, inflation is not really the problem. Inflation is quite sticky, but it's not like runaway out of control. So why are long bonds spooked?

13:35Katie Martin: I wish I had a perfect answer for you, Katie, but the market never admits of perfect answers. And I'd reframe your question slightly and say, why are they high now? Right. We know it has to do with developed countries having unsustainable deficits, but that's been true for a long time. The question is why everybody woke up and maybe they don't need a reason. You know, it's going to happen eventually and it just happens. And I think the combination of persistently high inflation, even if it's not rising much, and high deficits and no indication on the horizon that anyone is planning to do anything about these high deficits.

14:20Katie Martin: We can now see past the Trump horizon. He's got two more years, two and a bit more years. And it doesn't feel like fiscal sanity is headed our way when he's gone. And you could make similar comments about the rest of the world, Japan or whatever. So maybe this is something that's happening because it had to happen sometime, I guess would be.

14:46Rob Armstrong: I mean, I think the Streisand effect is real, but I think the unfortunate thing for Scott Besson is that all of this stuff happened last week just at the point at which the U.S. national debt crossed above$40 trillion for the first time ever.

15:03Katie Martin: That was unfortunate. It's just such bad luck. It is terrible luck.

15:09Rob Armstrong: And he was on the TV saying, look, 40 trillion is just a number. Let's not get hung up on a number. But everyone else is like, no, but it's 40 trillion bucks though, dude. Like that's a lot of money, isn't it?

15:20Katie Martin: These things, these salient big round numbers, they have an effect, even though it's completely irrational to have them effect. And look, I don't think we should just sit here. You know, I don't think we can just sit here and bag on Scott Bessent, right? He's got a problem. It's his job to try to solve it. the Treasury's secretary, their core job is to fund the U.S. government. That is getting more expensive to do. And he's trying to do something about it. He can't control Congress. The president can't really control Congress. Not that he's trying, but do you know what I mean? Like he's trying to solve a problem with the tools that are sitting on his desk.

16:05Katie Martin: And the problem is that the Tools are not up to the job. The problem is not Scott Bessent doing stupid things. It's that the situation, it doesn't help. But the situation's bigger than him, right? The situation's bigger than him.

16:21Rob Armstrong: He was again, like last week, he was in the same interview where he was saying, look, $40 trillion is just a number. He was kind of saying, look, trust me, bro. Like we've got some, like we've got some fiscal austerity ahead. You know, we're going to balance the books better. And that's like, OK, fine. But we can't see that yet. But he also said something interesting that might be worth bearing in mind. He said, first of all, that yields on long term US government bonds are just wrong. They're not reflecting fundamentals. And that is a look for a Treasury Secretary to be saying the market is wrong, but whatever.

16:53Rob Armstrong: But he also said that the market had, quote, bad information and that he had, quote, asymmetric information, which is basically him saying, I know something you don't know. Now, I guess we should take on face value that that really could be the case. Maybe he really does have something magic up his sleeve that can make a big difference to this situation. I'm struggling to see what it might be, but he's a Treasury Secretary and I'm not. So maybe there's a candidate.

17:20Katie Martin: There's a candidate for that, which is this administration is really going to drop the hammer on the budget in the next two years. And we're really going to try to push on that. I'm not saying that's likely, but that's the thing he would know that we wouldn't know is that somewhere under there is a fiscally responsible Trump White House. listeners. You're laughing, but I'll just leave it to listeners to decide whether that is likely or not. But that's the obvious candidate for the information that the Treasury Secretary would have and us dopes on this podcast would not have.

17:58Rob Armstrong: Yeah, if you have a great idea, listeners, unhedgedft.com. But so listen, we've talked about Besant versus Druckenmiller. That's a great drama straight into my veins, please. But we should also talk about Besant versus Kevin Walsh, chair of the Federal Reserve, because this is another thing in the background here that like dorks like us think is interesting, which is that Kevin Walsh, chair of the Fed, he's on record as having said, look, I think the fact that borrowing costs are higher is a good thing. It helps to kind of do part of the Fed's job for it. We should allow markets to just be markets and fluctuate around by their own accord.

18:37Rob Armstrong: And then, you know, a couple of weeks later, Scott Besson comes along and says, no, no, markets are wrong. And you're like, well, I mean, which is it? Are markets right or wrong? I don't understand anymore.

18:47Katie Martin: It's actually a deeper and longer standing position from Warsh than what you just described. Before he was the chair of the Fed, he wrote speeches and op-eds that talked about how the Fed getting involved in the treasury market, specifically, but not only by quantitative easing, buying treasury bonds. One of the evils of that, and he really hates that, one of the evils of that is that it makes deficit spending easier for politicians. Putting aside whether that's true or not, just accept that that's his view. He's sitting there and looking at what's happening in markets and saying very clearly markets are telling those dopes who control the purse strings quit it and this is something in principle he approves of so the moral of the story is besent on the one hand and warsh on the other are not singing from the same hymnal and you're starting to hear the dissonance here.

19:55You know, just the fact that while, according to Besant,

20:00Katie Martin: the Treasury market is not functioning smoothly, we haven't heard a peep from the Fed about that. I think that that silence is loud, as it were.

20:09Rob Armstrong: The silence is deafening. And Kevin Walsh is due to have quite a lot to say in the next few days. Oh, boy. So boys and girls, get your popcorn out. If you have ideas for what Scott Besson might have up his sleeve, as I say, unhedged at ft.com. But we are going to be back in just one minute with Long Short.

20:34Rob Armstrong: Okie dokie. It is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob Armstrong, back in the seat. What are you saying?

20:44Katie Martin: This comes from the Department of Gambling here at the Unhedged podcast. Yes. I've always thought that like the impossible thing to trade in markets is currencies. I would hate to be a currency strategist. I have no idea. But I am looking at a chart of the US dollar index. And it's in the same range it's been in for a year. And I feel like if the stuff we are talking about today really is going to bite, that's going to show up in the dollar eventually. So I am going to add to my terrible record as a forecaster by getting short the dollar at this point.

21:26Rob Armstrong: Yeah, yeah. If the stress can't come through in bonds, then it will come through in the currency.

21:32Katie Martin: In any case, for our listeners, this is a hell of an interesting time to watch the dollar, even if it's always a bad time to predict the dollar.

21:39Rob Armstrong: Yeah, yeah. This whole thing is just like catnip for macro people. I guess I am long tinned chickpeas. So the British government says here in the FT, stepping up work on a home defence plan, encouraging households to stock up on emergency supplies such as tinned food and bottled water just in case the Russians come for us or there's an attack on a UK energy facility linked to Iran. So that's cheerful. Luckily, I have quite a lot of tinned food in my house.

22:13Katie Martin: I'm a big chickpea fan. You can make a nice curry. The tin chickpea goes on a salad, put some feta in there. That's a really solid pantry item that every household should have, even in normal times, I would argue.

22:27Rob Armstrong: Although the posh chickpeas in jars are so much better. Are they? I didn't even know such things existed. Oh, my God. They are just sinfully good. They're really, really good. So chickpea news for you listeners there. we are going to be back in your ears on Thursday in the meantime please dig your trenches stock up on toilet roll and then listen up then